Launched in October 2020, Bancor v2.1 introduced two new concepts: impermanent loss insurance and single-side staking. This is achieved through having a supply of BNT that is elastic. Each pool consists of a BNT and a ERC20-compatible token (“Token A”) pair. When a liquidity provider provides liquidity for Token A, the protocol will mint an equivalent value of BNT. If the liquidity provider adds BNT instead, the protocol will burn BNT that was previously minted, allowing the liquidity provider to take the place of the protocol. Through this, a liquidity provider can partake in single-side staking without risking exposure to other tokens.
There is a catch to Bancor’s approach to single-side staking. The number of BNT that can be minted by the protocol is limited, which means that staking of Token A beyond a certain point requires an equal stake in BNT by the liquidity provider. Frequently, there is no “space” to provide the non-BNT token as liquidity, forcing users to stake on both sides of the pair. Popular pairs, such as ETH/BNT, are often out of space.
The Impermanent Loss Insurance for pools works by having the protocol subsidise the impermanent loss suffered by liquidity provider through the trading fees received from the minted BNT. In the event that the trading fees are insufficient to offset the impermanent loss, a surplus of BNT will be minted and given to the liquidity provider on withdrawal, provided that the liquidity provider has staked his tokens for at least 100 days. Such insurance is only available on whitelisted pools.
 Bancor v2 Technical Explainer